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What is GST (Goods and Services Tax)?
GST is an indirect tax, introduced in India in July 2017. GST is governed by a GST council and the Chairman is the Finance Minister of India, Arun Jaitley. GST has slab rates of 0%, 5%, 12%, 18% and 28%. Along with these, there is a special rate of 0.25% on rough precious and semi-precious stones and 3% on gold. Also, a cess on top of 28% GST applies to specific products like aerated drinks, luxury cars and tobacco products.
GST is a multi-stage tax since it will be levied on each stage that the item goes through from the manufacturer to reach the final customer. For instance, the item goes through the following stages:
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- Purchase of raw material
- Sale to retailer
- Sale to final customer
Now, GST will be levied on each of these stages and hence is a multi-stage tax. Similarly, GST will be levied on value additions, that is, monetary worth added at each stage. GST is also a destination based tax which means that the tax revenue from a product produced in location A and sold in location B will go to location B.
The four-tier tax structure of GST, 5%, 12%, 18%, 28%, has the lower rates for essential items and the highest for luxury goods. Service tax has gone up from 15% to 18% while essential items including food will be taxed at zero rate. The lowest rate, of 5%, is for common use items while ultra luxuries, demerit and sin goods attract a tax rate of 28%.
Impact of GST on Mutual Funds
The implementation of GST has caused temporary problems for various industries. However, in the long run. the impact of GST is expected to be positive. The following are the sectors or industries that might be most impacted by GST. These sectors also happen to be the sectors mutual funds invest in heavily.
Automobile and Transportation
The automobile industry in India is a vast business. Under the previous taxing regime there were several taxes applicable like excise, VAT, sales tax, road tax, registration duty, etc. Under GST, the tax burden on the end consumer has reduced. The importers and dealers are now eligible to claim GST paid on goods imported or sold which was not possible previously. GST also helps the manufacturers in procuring auto parts at the cheaper cost with the help of improved supply chain operations.
The stock impact has been expected to be positive for companies like Maruti Suzuki, MotoCorp, Excide, Mahindra & Mahindra. UTI Transportation and Logistics Fund is a sector fund that invests heavily in this sector. Many large-cap funds also heavily invest in companies belonging to this sector.
The logistics sector comprises of the road transport sector, storage and warehousing and third-party logistics. The logistics sector has been traditionally involved with a lot of problems. These include complicated networks, high coordination costs, inefficient supply chains, deficient infrastructure, entry taxes, etc. The large number of taxes made the logistics process cumbersome and costly. GST, however, has replaced the multiple state VATs and the need to have a hub in all states. This has helped firms redesign supply chains and centralise hub operations and take advantage of economies of scale. GST has helped in the smoothening of inter-state trade process.
Stock impact has positive expectations from companies including Container Corporation of Inda, Adani SEZ, and long-term positive impact on Gujarat Pipav Port.
FMCG is the fourth largest sector in the Indian economy. There are some cases where the tax rates under GST are higher than the present rates, while lower in other cases. GST impacts the FMCG sector by readjusting tax brackets and reducing distribution costs. Some companies have gained while others have lost due to changes in the tax regime.
The stock impact is expected to be positive for Hindustan Unilever, Emami, Godrej Consumer and negative for Titan, Bata and ITC. ICICI Prudential FMCG is a sector fund that invests in this sector.
Consumer durables are now being taxed at 28% which is slightly higher than the previous tax regime. Market analysts do not see any significant impact on the margins of consumer durable companies after the change in taxation regime.
The stock impact has positive expectations from Voltas, Havells, Crompton Greaves.
The GST rate on under construction projects remains 12% only. The impact of GST on the real estate sector is limited to cost structure and input credit available.
Stocks of companies like Sobha, Brigade Enterprises, Oberoi Reality and Sunteck have positive expectations from GST implementation. HDFC mutual fund has launched an NFO for a close-ended fund HDFC Housing Opportunities Fund. This fund aims to invest in the real estate sector.
Travelling in business class is now expensive since the tax rates have been increase to 12% from 9%. However, GST on economy class has been reduced by 1% to 5%. Aviation fuel is not under the purview of GST and therefore, indirect tax needs to be paid on the same. The airline industry now has to pay both the type of taxes, GST and indirect tax. Tax input credit is available only for economy class.
Lower tax rate on economy travel seems to be a positive for companies like InterGlobe Aviation, Jet Airways and SpiceJet.
What is Dual GST?
Most countries have a single unified tax system which means that a single tax will be applicable all around the country. However, in many countries, like Canada, Brazil, and now India, exists the concept of dual GST where tax is charged by both, Central and State government.
What is CGST, SGST, and IGST?
When the location of the supplier and the end consumer is in the same state, both CGST and SGCT are applied. While in case the two are in different states, IGST is applicable.
- Central Goods and Services Tax- CGST is a tax levied on intrastate supplies of goods and services by the central government and is governed by the CGST Act.
- State Goods and Services Tax- SGST is a tax levied on intrastate supplies of goods and services and is governed by SGST Act.
Integrated Goods and Services Tax- IGST is a tax levied on all inter-state supplies of goods and services and is governed by the IGST Act. It is applicable to the supply of goods and services in both imports and exports.
Advantages of GST
- Eliminating cascading tax effect– Before GST, several taxes were levied on the same product that led to an increase in the price of products. GST has eliminated the tax on tax effect.
- Product identification– The earlier classification of products into different categories caused a lot of confusion and led to litigation issues. GST aims to solve this issue by clearly defining product classifications as per international standards.
- One tax– Instead of several taxes being levied by state and central government, GST is now the only tax. It has replaced several hidden taxes and improved ease of doing business.
- Investment boost– As per GST, one can avail input tax credit on capital goods. This might lead to a surge in investments.
- Easy compliance– All compliances such as registration, returns, etc, have now to be done online which will make the process easier, hassle free and transparent.
- Transparency and less corruption– There will be a significant reduction in corruption in the long run as all money spent needs to be reported for taxation purpose. Also, retailers are no longer able to make sales without generating a bill.
- Regulating the unorganized sector– Industries like construction and textile are highly unregulated in India. GST has provisions for online compliances and availing input credit only when the supplies accepts the amount, therefore bringing around accountability and regulation.
- Increased efficiency in logistics– Restrictions on inter-state movement of goods have been lessened and now the logistics sector can start consolidating several warehouses across the country. Reduction in unnecessary logistics costs have increased profits for businesses involved in supply of goods.
Disadvantages of GST
- Change in business software- Most businesses used accounting softwares or ERPs for filing tax returns which already had excise, VAT, and service tax incorporated. Now the businesses need to change their ERPs or upgrade their softwares to make them GST compatible.
- GST compliances- SMEs are still not fully aware of the several compliances that need to be taken care of under the new tax regime.
- Increase in operating costs- Most the SMEs have usually preferred to file and pay the taxes themselves instead of hiring a tax professional, in order to save costs. However, they now require hiring a professional to do their taxes as it is a completely new system.
- Online procedure- For an economy like India which has been using pen and paper for a long time, this change to go digital is massive. Many small businesses are tech savvy since they do not own the resources for fully online compliances.
- Increased burden on manufacturing SMEs- Under the previous tax regime only manufacturing businesses with a turnover exceeding Rs.1.5 crores had to pay excise duty. But under GST the turnover limit has been reduced to Rs.20 Lakhs, therefore increasing the tax burden for several manufacturing SMEs. However, SMEs with a turnover of up to 75 lakhs can opt for the composition scheme and pay only 1% tax on turnover in lieu of GST. But these businesses then cannot claim any input tax credit.
- Mid-year policy change- The mid-year launch of GST will lead to problems in taxation and reporting during the end of the financial year. A lot of confusion could have been avoided had the policy change been done at the beginning of a new financial year.
Recent Changes in GST
After the 23rd GST council meeting there have been some changes in the GST regime. These include the following-
- The list of items in the top 28% in the GST slab have been reduced by 50% to 228 items now. Only luxury and sin goods are now in the highest tax bracket and items of daily use have been shifted to 18%.
- All restaurants will now be levied the GST at 5%, without input tax credit benefits.
- GST on 13 items has been reduced from 18% to 12%.
- Tax on six items has been reduced to zero from 5 per cent.
In short, there has been a moderately negative impact of GST on mutual funds. The impact is not that big but it definitely changes things to a certain extent in terms of mutual fund investments. However, the overall impact on the economy of India will be positive in the long run.
With GST and other reformative measures being implemented in India, the economy of the nation is poised to grow. One of the best ways to benefit from this growth is to invest in mutual funds. You can start investing in mutual funds using Groww. It is completely online and free of hassles.
Disclaimer: the views expressed here are those of the author. Mutual funds are subject to market risks. Please read the offer document before investing.